For how much longer will cash be king?

Stocks ended the week on their heels, despite decent earnings and signs of a resilient economy. The Fed will make known its opinion on matters later this week and traders are hoping for something… anything to get the bulls off the couch.

Corrections and amplifications. On Friday, the S&P500 closed in correction territory joining its usually jubilant sibling the Nasdaq, which slipped into correction territory earlier in the week. A correction is when an index, stock, asset class, or whatever, closes -10% or more below a recent peak. I am sure that you are not surprised to hear this news given what seems to be relentless selling throughout October. A close around here would put the S&P in the red for a third straight month. So, what’s going on with all this selling?

Are you confused? It’s ok to be. You are probably wondering how is it that the markets are so bad when the economy seems to be in great shape, earnings season so far is above-average in beats, and the Fed is kind-of on hold for now. Yes, there is a horrible struggle in the middle east but that has had little direct effect on markets so far. Yes, Congress has been naughty and shirking its responsibilities, but the markets are used to it by now, so it’s not that. Well, seasonally speaking, the markets are prone to temper tantrums during this time of year, but that is weak causality at best. So, you are right to be confused.

Let’s ponder a big question that you may not want to face. Are we headed for a bear market? Are bears selling this market and pushing it lower? If you just scan the headlines, you will find at least 50% of vocal stock strategists saying that stocks and indexes are expensive. Side note:that was my attempt at a joke because it implies that 50% of analysts don’t think stocks are overvalued. Wait, maybe we are onto something with that academic humor. Let’s address that head-on. You don’t need bears to get a meaningful decline in stocks. Stop… reverse and read that sentence one more time. Got it? Good, now pay close attention.

Sometimes, indifference can cause harm to markets. In other words, a lack of buyers will allow markets to drift lower even in the absence of sellers. Quite literally, there may be no one to buy the dips and prop stocks up. That seems reasonable given the current situation. Tech and growth stocks are typically the leaders in a bull market and those have been sidelined by perpetually high bond yields. Adding to that lack of leadership is the Fed which is unwilling to admit even partial success. In other words, the Fed could still throw a couple of kicks at the markets even though it is on its hands and knees. Finally, there is what I believe to be the real game-changer… money market yields. Right now, money markets, aka cash is providing such attractive returns, there is little incentive for would-be buyers to make a definitive move into stocks. To be clear, money markets are in no way a substitute for stocks when it comes to long-term investing, but attractive short-term yields simply raise the bar higher. Imagine sitting on a really, really comfortable couch with your feet up, and you are looking out the window. It may not be raining, but there are thick clouds in the sky, and the weather reporter on your television is unsure if those clouds will turn into rain or shine. Your best strategy is to wait it out and enjoy the comfy couch. Without that comfy couch, you may be more willing to take a chance and venture outside.

Do you remember TINA? It is an acronym for There Is No Alternative. Many credit the great success in stocks prior to 2023 to TINA. Bond yields were low, and the US had the strongest economy, so US stocks became the best alternative for investors worldwide. Right now, we are in TIARA! There Is A Reasonable Alternative. If you agree, there are only 2 things which can make that couch a little less comfortable. A bona fide Fed pivot which would serve to break the shackles off growth stocks, and that very same pivot which would cause money market yields to decline. One last note on that. For long-term investors, an invested, diversified portfolio is the way to success – the numbers prove it, so invested investors should remain invested, but if you are already in cash enjoying high money market yields, temporarily awaiting the market to pick a direction may be a bad decision but stay lively, because that will change fast… it always does.

WHAT’S HAPPENING THIS MORNING

L3Harris Technologies Inc (LHX) shares are higher by +1.76% in the premarket after Raymond James raised its rating to OUTPERFORM. RayJ stated that it thought the stock has bottomed out in the wake of strong Q3 results which showed an improvement in leverage and expenses. In the past 4 weeks 52% of analysts have modified their targets 4 up, 7 down, 10 unchanged. Dividend yield: 2.66%. Potential average analyst target upside: +29.8%.

Realty Income Trust (O) shares are lower in the premarket on high volume by -1.43% after it announced that it was acquiring Spirit Realty Capital for $9.3 billion. The transaction would require outside capital and would provide +2.5% accretion to AFFO, according to a statement by the company. The company is expected to announce its earnings next week. Dividend yield: 6.19%. Potential average analyst target upside: +30.3%.

FRIDAY’S MARKETS

NEXT UP

• Dallas Fed Manufacturing Activity (October) may have improved to -16.0 from -18.1.
• The week ahead: lots of earnings, more housing numbers, Consumer Confidence, JOLTS Job Openings, FOMC Meeting, Factory Orders, Durable Goods Orders, PMIs, and the monthly employment report. Check out the attached earnings and economic calendars for times and details.
• Earnings after the closing bell:  Western Digital, VF Corp, Vornado Realty Trust, Public Storage, Tenet Healthcare, Monolithic Power Systems, Pinterest, and ZoomInfo.